Friday, October 25, 2013

"Gender imbalances, and their resulting economic consequences, are still startlingly visible everywhere, from the developed world to emerging markets," writes Saadia Zahidi on GPS. "In Brazil, more women attend university than men, but women earn only a third of what men make for the same job. In the United Arab Emirates, three times as many women go to university as men, but half as many women participate in the labor force. Across Europe, women outperform men academically and enter the workforce in similar numbers, but occupy less than 15 percent of board positions. In Pakistan, where I grew up, a girl has only a 29 percent chance of making it into secondary school, compared to 38 percent for a boy."

On October 22 the Discovery Channel aired a fascinating program "What if...1962 Armageddon." The show gave the surprising information that John Kennedy barely missed being assassinated in December of 1960 by a suicide bomber. This was supposed to happen one Sunday when Kennedy was on his way to mass. In this instance, Jacqueline got int he car with him. The suicide bomber refused to attack with a woman in the car and the plot failed. Had Kennedy been killed during this assassination attempt, Johnson would have been inaugurated as president. The show talks about what would have happened if Johnson had been president. The worst case scenario was a nuclear exchange with some 120 million Soviet citizens killed and 20 million Americans killed. I have always wondered how Richard Nixon would have handled the Cuban missile crisis,had he been president. I have asked a Nixon scholar this question.

Wednesday, October 23, 2013

To all my friends out there I made it to 65 years of age early this morning. I was born in a hospital in Galveston, Texas at age 7.5 months. I was premature and weak. My mother and father got the sad news that I probably would not make it until sunrise because of my weak condition. One young intern who had recently graduated from the University of Texas Medical School disagreed with his learned colleagues. He worked on me all night long. When the sun came up over Galveston Bay on October 24,1948, I was still alive! The doctor who saved my life was Dr. Harold Ross.

I am now officially a senior citizen. I have survived wars,military coups, economic collapses, hyper inflation, etc. I have literally lived life at the very top and at the very bottom. Most important I have had incredible good luck.

Now is a moment to think of those who should have been here to wish me a happy birthday but are not here because they died unfairly and too soon. Let me now give your their names:

Treasuries have turned anything but risk-free

By John Plender

Those who can diversify out of US debt are likely to do so

The US debt ceiling imbroglio may not have resulted in sovereign default, but I suspect that the rise in US Treasury yields from early summer until the temporary resolution of the crisis last week may in due course be seen as reflecting the emergence of a risk premium.

An important message of this episode, in other words, is that the world’s main reserve currency is now a very unsafe haven, while US Treasuries are anything but risk free.

MARKETS INSIGHT

That, in turn, raises the question of whether the US is inescapably in decline as China rises to challenge its hegemony. Even without default it is clear, in purely financial terms, that anyone who can diversify out of US Treasuries will now feel impelled do so as far as possible.

Nothing could demonstrate more clearly how quickly politics can subvert the thrust of economics.

A mere month ago the US looked the only economy in the developed world close to achieving escape velocity from the crisis, as well as having an underlying dynamism conspicuously absent from Europe or Japan.

Yet the government closure seriously undermined its credibility in economic policy making while imposing a needless drag on growth.

The inability of the US to intervene in Syria has also raised questions about its ability to deploy hard power around the world. At the same time it has shown that its claim to act as a responsible custodian for more than 60 per cent of the world’s official reserves is tarnished.

Rating recklessness

The first exhibit on that score is the recklessness displayed by American politicians over the country’s credit rating. They have given the strongest possible hint that the degree of polarisation in Washington guarantees that fiscal punch-ups will be recurring events.

Nor is fiscal policy the only problem. Seen from the perspective of central bank managers of official reserves, quantitative easing constitutes dangerously experimental monetary policy for a country entrusted with $6.8tn of such reserves.

For emerging market countries, printing money via QE looks like a policy of competitive devaluation, even if it was embarked on for domestic reasons. And they have an understandable fear that exit from QE, which is the most experimental part of the experiment, will saddle them with even more seriously overvalued currencies along with higher interest rates on their foreign indebtedness.

It is also worrying for reserve managers that the Federal Reserve is operating in a fog. This is not just a matter of the impact of government closure on economic statistics, which will delay any retreat from QE. Nor is it purely about the lack of a route map for the exit.

The global financial system is hostage to a big rise in borrowing costs when the retreat from QE puts an end to the current era of extraordinarily low interest rates.

The rise in bond yields will thus inflict big capital losses on bond holders. Neither the Fed nor anybody else can know how those losses will be distributed around an increasingly complex system. How far bonds have been hedged or leveraged is likewise unclear.

Don’t believe central banks

Of course, the central bankers’ response is that the prudential regulators are well aware of the risks and will be on the alert. That is the same message they peddled back in 2008 when they were hopelessly wrong footed after the collapse of Lehman Brothers. Believe it at your peril.

So is there a parallel here with the transfer of hegemonic power from the UK to the US between the wars?

Yes, to a degree, but the differences are important. The UK was far weaker economically after the first world war than the US is today. The current crisis in the US is more political than economic. And it has to be said that American politicians are doing their utmost to speed up the transfer of power from the US to China. Yet where reserve currency status is concerned, it will take time for China to offer the world a credible reserve currency, not least because its financial markets remain under-developed.

As I argued here two weeks ago, the obvious message for Beijing is to accelerate the pace of financial market development. It will be interesting to see whether the communist party plenum next month unveils plans to do this.

Yet when contemplating blunders on the scale the US has just inflicted on itself, it is easy to underestimate the problems of strategic rivals. The challenge for China in its proposed liberalisation of interest rates and opening up of the capital account is quite as great as the exit from QE will be for the US.

Even so, declinism is now in fashion. It is safe to predict that this will be the global publishing business’s next growth industry.

Shanghai soars as an EMBA destination

Cathy Lin of Sheshang International wanted China-specific teaching in a global context

Shanghai has long been a city thirsty for fresh ideas, and today China’s commercial hub has become a magnet for domestic and foreign business schools and students.

The city’s development into a business education hotspot happened quickly. China’s first MBAs were awarded in the mid-1990s, and the first EMBAs later that decade. The country, however, is making up for lost time.

IN EXECUTIVE MBA

John D. Van Fleet, assistant dean of the University of Southern California Marshall School of Business and executive director of the USC-Shanghai Jiao Tong (USC-SJTU) Global Executive MBA in Shanghai has witnessed a significant expansion in business education in just 10 years.

“It is commonplace here to look at the environment and see this rapidly developing, maturing economy and realise you have got to have people to manage these businesses – and that requires business education,” he says. “That’s a primary reason for the explosive growth and the reason that the ministry and the local government entities have generally been supportive.”

The EMBA participants have changed too. Hellmut Schütte, dean of China Europe International Business School (Ceibs), has seen growth in the numbers of entrepreneurs at his school. “The private sector is becoming more dynamic and there are more people building their own business. Of course, 10 years, 15 years ago, that did not exist,” says Prof Schütte.

EMBA programmes in Shanghai fall into distinct categories according to their target market. Some, such as China’s biggest domestic business school, Cheung Kong Graduate School of Business (CKGSB), Arizona State University’s WP Carey School of Business and Ceibs, focus on Chinese executives, with most instruction in Mandarin – although Ceibs also offers a global EMBA in English.

Others are less focused on the Chinese market, with tuition in English. On USC-SJTU’s Global Executive MBA, only 30 per cent of participants are Chinese citizens. Some 30 per cent live elsewhere in Asia and fly in to take classes, and there are about 12 nationalities in any one class.

Cathy Lin, president of Sheshang Group, a Shanghai-headquartered company that provides management and marketing services to the luxury sector, is taking her EMBA at Ceibs. Her explanation of how she chose a school illustrates how seriously China’s young leaders are taking their careers.

“The main criterion for me was that courses should be practical, inspiring and forward-looking,” she says. “Many of my friends, who are outstanding entrepreneurs, recommended that I enrol here because Ceibs can offer knowledge that is specific to China, but within a broader global context. I wanted to choose an environment where I would really learn something.”

With so many potential clients, western business schools have been keen to start an EMBA with a Chinese partner. “Foreign universities, particularly those in the US, are known to be entrepreneurial in character,” says Gerard Postiglione, director of the Wah Ching Centre of Research on Education in China of the University of Hong Kong. “That’s part of the motivation for setting up education programmes in China, because they have the growing middle class and, from the Chinese side, there are certain advantages to keeping students in the country, getting an international education which promotes innovation and creativity and helps them to be more competitive after they graduate.”

Prof Postiglione believes that the rush to China is not a matter of fast profit for western business schools, but rather that the top schools now simply need a presence in China.

Buck Pei, executive dean for China programmes at ASU’s WP Carey School, says it was a “conscious, strategic choice” to launch in Shanghai and to focus on programmes for executives from the government and state enterprises. “The most important customer in China is the Chinese government. From the impact creation point of view, ASU’s vision has always been that we try to create impact through education and that should transcend national boundaries,” says Prof Pei.

For foreigners, an EMBA in China is an effective way to build a network of connections in the business community, and affords vital insight into Chinese company culture. “We have three who come from Los Angeles in the current class,” says USC Marshall’s Van Fleet. “They are coming here to be a part of this programme because they see their careers as having a heavy China-Asia orientation and it makes sense for them to be studying with people who are working in this part of the world.”

While demand from executives is a key reason behind the EMBA growth, Shanghai’s business school landscape has flourished in a large part because of the city’s forward-looking education commission.

“It’s at the cutting edge of education reform,” says Prof Postiglione. “It’s amenable to Sino-foreign co-operation and more flexible in how it manages to adhere to the laws for [this].”

While Xiang Bing, the dean of CKGSB, argues that a business school really has to be in Beijing, where key decisions are made, if it wants to run a programme that covers China, he agrees that “the Shanghai government maybe has a more welcoming attitude towards foreign institutions”.

Besides offering a wealth of business opportunities, Shanghai is a very livable city for foreigners. In terms of pollution levels, for example, it rates better overall than Beijing. “If you have the largest city in the country, with the top five per capita GDP, that argues for plenty of wealth to invest in education. And this is historically the city of commerce in China,” says Van Fleet. “All of these things lean towards Shanghai being the place that gets the attentions of foreign academic institutions. It worked with us.”

As far as the future, business school leaders are unanimous that, while the EMBA market is competitive, it is far from saturated. They are experiencing no slowdown in their programmes.

“I think in the aggregate EMBA or business education space, there will be double-digit growth for the foreseeable future because there’s so much need in China,” says Van Fleet.

The challenge for the business schools is not finding executives who can fund EMBAs, but choosing those who will enrich the alumni pool, and attracting top faculty members.

“There are not enough good business school professors,” says Prof Schütte at Ceibs. “A good business school professor is someone who is in research and at the same time a first-class teacher. The participants are 40 years old, they pay a fortune to us and are very critical.”

If it had been any other country than the US, we’d all have had a good laugh before putting our money elsewhere. The guilty nation would have faced a much higher cost of credit and a much weaker currency.

MARKETS INSIGHT

Because, however, the US dollar and Treasuries provide the anchor for the global financial system, we merely breathe a sigh of relief and keep our fingers crossed that, next time, a deal will be struck without too much blood being spilt.

Russian roulette

That may be a forlorn hope. Many Republicans voted Wednesday night in favour of default. Some, it seems, are prepared to play a financial version of Russian roulette, thinking that a default need not lead to disaster – in the same way that, five times out of six times, pulling the trigger does no harm. Others have regarded the recent federal government shutdown as a way to demonstrate the case for small government. They might be willing to do the same thing all over again in a few weeks’ time.

There are also some more serious undercurrents. One is the persistent absence of decent economic growth. During the 1980s and 1990s, the US economy happily chugged along at 3-3.5 per cent per year. Since 2000, the pace has slowed to an annual rate averaging around 2 per cent. Even though, this year, the budget deficit has ended up lower than expected, the longer term fiscal arithmetic is, to say the least discouraging. Unless Congress grapples with this challenge now, the fiscal debates will become even more protracted in years to come. The US will end up being either a high tax or low spending economy. Reaching agreement on which will be, to say the least, difficult.

The second, related, issue is the incredibly high level of income inequality in the US. John F Kennedy used to claim that “a rising tide lifts all boats” but, in modern-day America, that aphorism no longer seems to work. The gap between ‘haves’ and ‘have-nots’ has become ever larger, and the number of ‘haves’ has got ever smaller: even wages for university graduates have, in many cases, struggled to keep pace with productivity gains. What role should government play in this story?

Some think it should be more than happy to redistribute slices of the economic cake. Others take a more 19th century view, arguing that, because the rich tend to save more, they are better able to provide the funds for long-term investment that might, otherwise, be squandered to buy votes.

The third issue is America’s financial relationship with the rest of the world. The battles witnessed in Washington over the last few weeks suggest that at least some US politicians have lost sight of the fact that the US is heavily indebted to the rest of the world.

Reserve currency status helps keep the creditors at bay – the costs of walking away from a dollar-based global financial system are possibly greater for America’s creditors than they are for the US itself – but reserve currency status also allows Washington to slip into bad habits that no other country could ever contemplate.

Even if the debt ceiling is raised, even if further shutdowns are avoided, there is a danger of a growing mismatch between America’s own fiscal ambitions and the interests of its creditors.

Vietnam War

It’s not quite the same story but the early-1970s break-up of the Bretton Woods system of fixed but adjustable exchange rates provides an intriguing precedent. The mounting costs associated with the Vietnam War led US authorities to crank up the printing of dollars in the late-1960s.

Eventually, the growing inconsistency between US political ambition and global financial need led to the Bretton Woods system collapsing altogether, paving the way for the financial chaos of the 1970s.

Ironically, the current budgetary mess has also encouraged the printing of dollars. The Federal Reserve’s decision in September not to taper seems, in hindsight, to have been remarkably prescient. With the countdown to another potential debt ceiling stand-off already under way, it may even be tricky for the Fed to contemplate tapering in December.

The extra liquidity associated with quantitative easing has already triggered financial upheaval elsewhere in the world – most obviously in some of the more fragile emerging economies – but a further attachment to quantitative easing in a bid to mask Washington’s fiscal dispute may only encourage further problems down the road.

It may often seem that there is no alternative to a dollar-based international financial system. There is. It’s called financial chaos. The deal struck this week is more than welcome. The risk of financial chaos, however, has not yet gone away.

Wednesday, October 16, 2013

The debt-ceiling doomsday device

By Martin Wolf

The ceiling is so dangerous because Obama could not obey it in a non-destructive way

Some laws are too dangerous to be allowed to remain on the books. Take, for example, the US debt ceiling. It is the legislative equivalent of a nuclear bomb aimed by the US at itself, with the rest of the world within its blast radius. What must never be used should not exist. Regardless of the outcome of the current negotiations, the law needs to be repealed. Orderly government cannot be pursued under so destructive a threat. It is quite different from a partial government shutdown. Albeit foolish and unjust, that is just about manageable. Failure to lift the debt ceiling is not.

The imbroglio over the ceiling does have a darkly amusing side. Many will recall Republican insistence that “uncertainty” was thwarting economic recovery. Yet it is difficult to imagine policies better designed to create maximum uncertainty than a possible default by the world’s most important debtor. Asked about the consequences of a failure to reach a deal on the ceiling, Jamie Dimon, chief executive of JPMorgan Chase, responded: “You don’t want to know.” But we must seek to know; the results would be calamitous.

MARTIN WOLF

Why is the debt ceiling too dangerous to use? This question has two answers.

The first is constitutional. In a recent article, Neil Buchanan of The George Washington University and Michael Dorf of Cornell argue that a binding debt ceiling would create a “trilemma” for the president: “Ignore the debt ceiling and unilaterally issue new bonds, thus usurping Congress’s borrowing power; unilaterally raise taxes, thus usurping Congress’s taxing power; or unilaterally cut spending, thus usurping Congress’s spending power.” Thus, a binding debt ceiling would force the president to violate his obligation to “take care that the laws be faithfully executed”. The authors conclude that the president should choose the “least unconstitutional” course and ignore the debt ceiling. But, inevitably, whatever the president did would create a constitutional crisis. No responsible Congress would seek to put the president in that position.

The second reason why the debt ceiling is so dangerous is that the administration could not obey it in a non-destructive way. At some point between October 17 and the end of the month, the administration would lack the money to pay its bills. All choices would be dire.

One much discussed choice is “prioritisation”: the federal government would pay “high priority” claimants, such as the Chinese government, and default to “low priority” claimants, such as beneficiaries of Social Security or Medicare. Yes, the idea is that awful.

The US Treasury has two potent objections. First, prioritisation would not protect the “full faith and credit of the United States” – it would still be a default. Second, the US government’s computer systems do not allow it to choose among the close to 100m payments it makes a month. But Fedwire, the system that handles sovereign debt payments, is distinct from the systems making payments to government agencies and other vendors. So maybe the US Treasury could pay the former obligations first and then use any remaining money for the latter, a possibility it denies even exists, to preserve its bargaining credibility.

Even if possible, which is unclear, the politics of prioritisation would be disastrous. Yet the economics of a failure to service debt would be worse. US Treasuries are the world’s most important safe assets. If they were to default, even temporarily, there would be an immediate impact on risk premiums and a quite possibly permanent impact on their role as havens. Haircuts would be imposed on their use as collateral. The result, as my colleague Gillian Tett has noted, might be a huge disruption to market liquidity and credit across the world. A Lehman default is one thing; a US default would be quite another. No wonder the gathering of central bankers and finance ministers in Washington last week for the International Monetary Fund/World Bank annual meetings was so agitated about the issue.

The less economically damaging alternative would seem to be for the US government to default on its non-debt obligations. Indeed, many in the Tea Party believe the ceiling is a way to impose a balanced budget, though one that would curtail even the short-term borrowing normal for households. Today, this would require immediate elimination of a deficit of about 4.2 per cent of gross domestic product. An instantaneous cut of this magnitude would lower GDP by far more than the 6 per cent that conventional multipliers might suggest. The reason is that all built-in stabilisers would be cut off. As revenue fell along with GDP, spending would automatically shrink further. GDP could fall 10 per cent. This would inflict a domestic and global disaster.

Thus, if the administration were to obey the debt ceiling, it would have a choice between a debt calamity and an output disaster. Yet Barack Obama is also right that he cannot concede to people wielding this threat because that would increase their incentive to use it and so, in the long run, the likelihood that the bomb would explode. This device needs to be disarmed. Alas, that is not going to happen.

So the administration also needs to decide what it would do if the ceiling were not to be lifted in time – be it now, next month or at a later date. The least bad answer would be: keep borrowing. The president cannot state he would do so, before the fact. Indeed, he must deny it, since knowing this would lower his opponents’ incentive to raise the ceiling. Yet, if it came to the worst, he would have to borrow, invoking the need to preserve the credit of the government, without which it would be permanently damaged.

Borrowing under a constitutional cloud would be risky. The simplest way to minimise these risks would be to borrow short-term. After all, the US Federal Reserve must ensure that the interest rate remains zero, in order to preserve its monetary policy. The House of Representatives might impeach the president for the “high crime” of ensuring the US government fulfils its promises, but this would fail in the Senate. Someone might challenge Mr Obama’s decisions in court. But how could a judge conclude that the president acted unconstitutionally if Congress has given contradictory instructions?

It is insane that such a discussion is even possible. Abolish the ceiling now. It is an invitation to mischief.

If truly faced with a U.S. default, minting a trillion dollar platinum coin becomes the only legal, constitutional option to avoid default. Since the Fed would have to accept the coin, the Fed would essentially be expanding the monetary base by a trillion dollars which is what it's been doing already with quantitative easing.

The best part is that a trillion dollar coin makes the debt ceiling irrelevant without repealing it which would surely set the stage for an eventual repeal.

The only real solution to this mess, is for Republicans to immediately form the "New Republican Party" and let the Tea Party nutters and their supporters in both the House and the Senate remain as the Republican Party.

There is absolutely no future hope for the Republican Party in its current form. There is only so much gerrymandering they can do to have the remotest hope of running the Senate and the White House. Peter King should lead the charge to establish a new party and leave John Boehner to lead with the nutters.

Pismo1 The US is not stealing to feed the mouths of the "greediest generation," (Social security payments to current retirees). We stole from them when we fought Vietnam, and the two recent elective wars without raising taxes to pay for them, (Iraq-your social security money at work). We did it again when we blew away the surplus that the government was running at the end of the Clinton administration. And I could go on. I guess that tax cuts for the wealthy does not qualify as being "greedy."

God forbid that we should actually fund Social Security properly-instead of stealing Social Security money and then blaming the recipients for being "greedy." More GOP wackiness.

Ultimately this is about the GOP being a responsible party that isn't held hostage to the radical agenda of a bunch of ignoramuses who like some in this comment section are wholly blind to the results of their actions.

Not only are the costs to the economy equivalent to the detonation of a number of nuclear devices, also the days of the Republicans as a party would be numbered when social security and medicare payments were to be suspended. Now it does seem that a number of senior Republicans such as Mitch McConnell have finally heard the clarion call. Let's hope they're on time.

It is incomprehensible to almost everyone that those playing with the debt ceiling are willing to do this. That they are happy to continue to inflict great economic harm, wreck their country's reputation and hurt gravely its ability to lead in the future. And what's their cause? Stopping poor people getting healthcare.

I've always greatly admires the USA. It's innovation and creativity is extraordinary. From the moon landings the internet, it's accomplishments are vast. Yet it also seems to have a dark and destructive minority. We can only hope that they get smaller and those sane and enlightened get larger.

Mr Milne: My main point was that the president and the Democratic majority in the US Senate should "work constructively with those who do not fully share their view of the world" to reach an agreement on the debt ceiling/budget. Apart from the debt ceiling / budget negotiations which are currently turning on the timing of Obamacare's implementation and maintaining the "sequester cuts" (so, no major legislative overhaul in the short-term), on a broader scale, having gained a majority in the US House, the Republicans, it seems to me, are trying to effect a change in a piece of legislation which they (a) didn't support in the first place and (b) disagree with on a fundamental basis. It is not clear to me that the Republicans are considering jettisoning Obamacare as a quid pro quo for raising the debt ceiling.

As to your assumptions as to who will be held accountable for a failure to agree a compromise on the debt ceiling/budget, time will tell. Recent polls would suggest that neither political party, nor the president, would escape untarnished - which is the way it should be. So, who exactly has who by the "short and curlies"? I would suggest that there is ample reason for both sides to come to the table in good faith.

And I'm pretty sure there's some precedent for one Congress reconsidering the actions of a previous Congress. The 18th/21st Amendments come to mind.

In any event, despite your apparent intentions, you seem to have made the same argument I'm making, and you seem to agree with my understanding as to how democracy is meant to work. It's reassuring to know that I am in good company.

If someone has to be charged, it would be the senators refusing to sign the bill, and they should be charged with treason. The economic consequences would be worse than almost anything Al Qaeda could have accomplished. This situation reminds me of the episode from the bible where two women argue over the custody of a child; Salomon suggest that the child will be cut in half; and he finally grants custody of the child to the one renouncing her claim. Republicans are acting like the angry woman who prefers killing the child rather than renouncing its claim on it.

Barack Obama voted against raising the debt ceiling when he was a junior senator from Illinois in 2006, and George W. Bush was president. He concluded his speech by saying:

"Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. AMERICA HAS A debt problem and a FAILURE OF LEADERSHIP." (Emphasis added.)

His remarks are weirdly appropriate to the current impasse. I couldn't have put it better myself.

In April 2011, President Obama dismissed his vote against raising the debt ceiling as “just an example of a new Senator, you know, making what is a political vote as opposed to doing what was important for the country.”

Brings some light on to the disaster that is the US financial system. We need to steal from children to feed the greed of the greediest generation in the history of the world. Living with what we have is apparently out of the question and "disasterous" so the theft continues. Pathetic. Greed on an unprecedented level.

Martin: your choice of priorities is telling.The Chinese government is rich and can afford to do without some debt payments.The recipients of Social Security are poor and need the money to survive.....Pretty sick, when you think about it.

perhaps you should reflect a little more on what you write -- do you really understand how democracy works?

the Tea party agenda of small government, low taxes, balanced budget appeals as an abstract credo. But effective right of centre politicians (Reagan, Thatcher etc.) always understood that this sort of vision was only ever a long term goal, that in order to move in the direction they wanted to go it was always necessary to work constructively with those who do not fully share their view of the world. That is democracy.

by working to overturn legislation that is already passed the tea party are acting against the very process of government itself (don't like a law that has been legislated, well no problem we can always use the next budget round to have that law cancelled or delayed).

This a huge gamble, voters want some government and they want it to work efficiently, even if most of they would like it be a bit smaller, less expensive and less intrusive than it is now. So the prospective outcome is a huge electoral set back for the Republican party (if it does not split into two in the meantime) and a strong shift towards socialism in the US.

No reason for Obama to negotiate at all -- to use a British phrase he "has you by the short and curlies". You either back down or face electoral oblivion. Unfair and underhand? Well that is how effective politicians play ... they don't have to be nice when the game is in their hands.

the only two rational interpretations of right wing Republican actions I can think of are (a) a conspiracy theory -- the tea party have actually been infiltrated by left wing socialists who want to see a socialist future for the United States; or (b) a totally selfish focus of right wing Republican members of the House on their own individual prospects in primary elections, because they might lose to even more right of centre radicals, and they do not care if their selfishness results in socialism in the United States.

mr. Wolf. The question is not how do we get around the debt ceiling, the reat question is how did we get to these debt levels in the first place. How can we keep moving forward in a world that is addicted to debt? Ifv you would do the base math on Us budget deficit and subsequent growth of state debt as a percentage of GDP and then offset that against the growth you would see mr. Wolf that there is no real growth. There's nothing at the most and shrinkage in real terms.

And then you indicate that it would be best to abolish the debt ceiling as it only leads to unrest in the markets and the world at large.

You are wrong mr. Wolf. It's not the ceiling that is causing this. It's the never ending crave for non existing money to be created out of thin air that's causing this. Keynesians like you have to learn to live within their means. The world will become a much safer place. And debt ceilings serve the function why they were created in the first place.

This is not about the debt ceiling (it should be). This is about the blindness and ignorance of a group of fanatics captured by the health and insurance lobbies. Who, by the way, were the first responsibles for the monstrous debt imposed by the war lobby.As long as we continue to elect captured or ignorant politicians (left wing or right wing) we will have deficits and debt slavery.

@Ealing: My general point was that the argument that the president's only viable option is to act against the constitution is a little wacko, and that if both sides were to come to the table in good faith a negotiated solution could be reached. This is how the democratic process works. If the president were to give on the timing of Obamacare, a negotiated solution would certainly be reached. And, given the hiccups (to be generous) in the early stages of the implementation of this legislation, wouldn't it be wiser to take a more measured approach towards its implementation?

My intention was not to open the discussion about the merits of Obamacare. Just to be clear, though, its approval in Congress involved not a single Republican vote, its upholding in the Supreme Court was solely on the grounds of whether it was actually constitutional (ie, legal) and not on its merits and polling shows that it is not exactly supported by a majority of the electorate. And, in light of the fact that the president cannot just push through the financing of Obamacare as he did its implementation, one must ask who, actually, could be said to have lost the election.

In any event, reverting back to my main point: there is ample room for negotiation around the budget/debt ceiling issue, and there is no need to even contemplate (or justify) a constitutional transgression when a clear, constitutional solution is perfectly available. If the president takes the approach that he needs to "call the Tea Party's bluff", there is a high probability that this is all going to end in tears. And if that happens, the president should be held firmly responsible.

And as to whatever "side" I'm on, and whether me (and my ilk) are responsible for destroying the GOP, I would suggest that you may not want to jump to conclusions as to who I am and what my allegiances are. "Obama must not and will not be blackmailed." - Really? Who is the fanatic?

Martin,The debt ceiling has been part of the US constitution since the country had public debt.

In 2006 senator Obama voted against increasing the debt ceiling, this at a time of lower deficits and debt. Keynes said the boom is the time to cut the deficit and in 2006 the US was growing strongly so Obama's actions had some merit. However, he now says it was a "political positioning", this was part of a strategy he used to raise his profile as set up a presidential run.

The likes of Ted Cruz, Rand Paul etc are playing from the same copybook so Obama can hardly complain.

I will repeat what I've already said - much fuss for little outcome - a solution will be found, probably last minute. From my point of view it's America's stand as World General, a sort of reminder that they are still "vital" on today's World Economic scenario created by Globalization.

Clearly there is an imminent danger of chaos which will probably be forestalled by an agreement by yet another small increase in the debt ceiling, but perhaps the greater threat to the US is an insidious longer term one. As the US inevitably declines in relative global importance and other countries offer increasingly viable alternatives to dealing with the US, these frequent dysfunctional standoffs are going to gradually deter lenders and increase the cost of even a fixed or falling debt stock. So, if there is not going to be agreement to remove the debt ceiling (and I can see the arguments for some overall constraint on public debt given the short-termism of politicians), it needs to be reformed in some way. My suggestion would be to allow the debt ceiling to grow at some longish term average of nominal GDP minus x - "longish term", say ten years, to avoid both an immediate incentive to inflate and a procyclical cap on deficits during recessions; "minus x" to achieve a gradual reduction from the presently large debt burden. Responsible Republicans should be willing to agree to this form (and then they can debate x) because it would achieve the objective of keeping the US clear of a debt trap, but without mandating such a large fiscal contraction.

This paradox exists because the consequences of the debt are so grave. Increasing debt is a disease that takes hold slowly with relatively little pain and so the final catastrophe is delayed but made bigger. It seems to me that Martin's list of 'unthinkables' are mild in comparison to a world where (suddenly) the US cannot borrow at all because no one expects to be repaid; that is a world where the US raises debt that is paid for by strategic concessions. If not now then WHEN or HOW?

I thought this argument had been conceded by most Republicans. You return to the Tea Party demand that the President somehow "make concessions" with the ACA. Why would he make any concessions in an act approved by Congress, challenged in, and upheld by, the Supreme Court, and subsequently endorsed by the American people as a central plank of his reelection campaign?

You suggest his only way out of the dilemma is to back down on his modest proposal for healthcare. Actually, were he to do that, he would be ensuring that all of his successors would be liable to be held hostage by a small group of fanatics who lost the election but were intent on destroying the credit of the US unless they achieved an aim which had been rejected by the people in a ballot.

Obama must not and will not be blackmailed. The only way out of this dilemma is to call the Tea Party's bluff, invoke the democratic solution and allow the House to vote on the Budget. There are enough sane Republicans who believe it is quite wrong, and destructive, to allow a small right-wing coterie to hold the President to ransom, and the House will, therefore, vote to pass the budget.

The numbers holding your view, as the polls attest, grow ever smaller by the day. Your side has lost this battle. You may have destroyed the GOP in the process, which is a tragedy for the American people.

On the debt trajectory and money printing path we are on, there is carnage down the line anyway. I would rather have the carnage now rather than even greater carnage down the line. What is more likely is another short term muddle to please the likes of Wolf who doesn't like "mischief".

Firstly, highly indebted nations should allow deficits to rise even further (ie no austerity). Now a restriction on a highly indebted government to issue debt should be lifted. I'm starting to understand Wolf's economic philosophy. Debt is harmless because US/UK can print infinite amounts to service debt. Debt and money printing are harmless in the long term even in ever larger quantities. How much does this guy get paid? Mischief is the least of our worries with "respected" economists like this being patted on the head by the editor of the only financial press source in this country. This is a clueless economist ignoring the obvious to please the heartless.

And so Mr Obama finds that we live in a world where we must sometimes choose from a range of bad options.Now Mr Wolf is learning the same lesson. And he seems genuinely surprised."Cake or more cake?" is what he's after.Where have they been for the past 20 years? Trying to build a world where the only options are good ones. Not gonna happen.

Mr. Wolf seems to advocate the wrong thing by saying that 'what must never be used should never exist' quoting his own words when referring to the debt limits. There are a lot of such laws in the British constitution, that have never been repealed or abolished, known as the Queen's prerogatives. There exist under the US constitutional system what is known 'checks and balances' to curb the excesses or profligacy of the executives. The US president, when it was created by the thirteen sea-board states, was supposed to assume the monarchical power of mad George (the British monarch). They combined indeed the powers of the monarch and the prime minister in one person. But the forefathers of the US constitution also ensured that he (the President) would not wantonly engage in perfidious sprees of spending, squandering public money and raise more taxes or embarking on unnecessary wars. It is basically this age-old issue that facing the US right now, whether there is or not 'checks and balances' with regard of spending public money. The President, who holds tremendous powers known as the most powerful person on earth but as the US democracy wants it that the US president could throw his weight, power and influence around as long as he spends within the limits set by the two houses of the Congress, as the American saying goes 'no free lunch'. In fact Mr. Obama's debt problem was left over from the previous administrations. Under the present US constitution the only way left is to find a compromise in the spirit of what the French call 'cohabitation'. Indeed the problem could otherwise drag on in a deadlock.

If the debt ceiling were removed would Treasuries remain the first port of call for dollar rich foreign sovereigns? What price the dollar as the currency with forward guidance of eternal QE and low rates?

Not a very clever idea. The end of the idea of a reserve currency would be hot on the heels of such action.

Mr Wolf seems to be suggesting that the US Congress is essentially forcing the president to act unconstitutionally. If my understanding of his reasoning is correct, the president is facing this constitutional "trilemma" and the only solution is to act, well, unlawfully. The US Congress has put the president in this box, and his only way out is to break the law. And if someone had the bad form to actually take the president to court after the fact, no judge (in his/her right mind) could possibly find his actions unconstitutional because the Republicans made him do it.

The pure undiluted absurdity of this argument makes me light-headed. There are variations on the main theme, but if the president would make concessions on the timing of the implementation (not even the substance, at this point) of his healthcare legislation, the debt ceiling and budget issues would be resolved. The president, frankly, has to decide whether his legacy (by way of Obamacare) is more important than the US (and, even, global) economy. As such, it is not a box, but a dead-end, and the only way out of a dead-end is to reverse course - in this case, back through Obamacare.

And, as an aside, the debt ceiling is not nuclear bomb which the US has aimed at itself; rather, it is a control which many American people feel it is necessary to maintain on its politicians because they fundamentally do not trust them to manage the government's finances responsibly. Would anything in this budget / debt ceiling crisis debacle suggest that this distrust is unfounded?

"Now we have a debt of 130% of our GDP..... " The UK has had a debt ratio of about 250% after the Napoleonic Wars and Second World War. It was over 150% after the First World War. Yes, they were exceptional situations. Yes, paying off the debt was painful and required occasionally creative accounting and exceptional measures (inflation certainly helped). But we paid back the debt. People should stop talking as if a 100% ratio (or even a 200% ratio) implies certain default. It depends on the ability of your economy to grow out of the problem, and it depends on the willingness of the politicians (and people) to pay the debt.

"On the other hand forcing the issue to be addressed in spite of the pain might mean that the resulting recession is containable, rather than terminal." You've heard of the Great Depression, right? The Second World War? You realise that is what you're talking about when you talk about a "containable" recession, I hope?

No Mr Wolf, the debt ceiling is a great tool.It is too bad other countries do not have it.If the markets do not do their job (i.e. they keep lending money at ridiculously low rates to countries such as the US, UK, France...) this wake up call is good news.Perhaps the fact that deficits do matter eventually will start to sink in. Same for a country as for a household.

Politicians incentive is always and everywhere to spend money they do not have. That is not a criticism, that is just how things are. Unless you have constitutional budget equilibrium mandates, public financial affairs will always drift into debt abyss. It took time - 30 years or so - but now many countries are just debt slaves.

Congress's borrowing and taxing powers, yes; but Congress's SPENDING power ???Spending is what the government does, not congress.The US military has plans for invading anybody.It is the administration's most pressing duty to have a plan to prioritize spending. And to motivate Congress, perhaps Obama should articulate it.

If Obama kept borrowing, who would loan him the money? Especially considering that the Supreme Court might well rule that the borrowing was unconstitutional and therefore illegal and therefore having no right to expect repayment. Investors who bought those notes might never see their money again.

The advantages of a US default would be that it might ignite the beginning of a prosess that would rewind the globalisation of the financial market and free flow of goods which has both enabled and created the the tradeimbalances, the huge privat and sovereign debt growth, the growing income and wealth inequalities, and the youth unemployment in EU and US (due the the offshoring of manufactoring). The debt ceiling is the trumph card for the silent majority (or large minority) that has been overrun by politicians running as agents for the capitalowners using the false "trickle down" argument for why growing GDP and maximicing stockmarketvalues also are to the benefit of those down the ladder.

I might agree with Martin if he first explains to me how the US will pay back the mountain of debt which it currently owes. Without explaining this he is merely digging his head deeper into the sand.

The bomb which threatens to explode is not a nuclear one. It is instead a rather well targeted smart bomb aimed at the financial sector. Many bankers would suffer, as they should, for their daft belief that government debt is 'safe' when history shows that it everywhere turns into voluntary taxation in the end. Anyone who holds too much of it (financiers mostly) would be knocked; anyone who accepts it as collateral without a discount would be severely hurt (financiers); so would many users of high leverage (yes - financiers again); while anyone who insures against default in this stuff would be crippled (you guessed it - yet more financiers). This is why Mr Dimon utters darkly that we "don't want to know" - a rather patronising utterance in my view, with a suggestion that only he is both clever enough to understand, and kind enough to hide the horror from us. Believe me, he is neither.

No - the genuinely nuclear explosion is what happens when the Dimons of this world persuade the Wolfs that they must not address the real problem just yet, while they continue to profit from making it worse. That is financial appeasement. On the other hand forcing the issue to be addressed in spite of the pain might mean that the resulting recession is containable, rather than terminal.

This is the very point of why there are 'checks and balances'. The US system was not intended to be a parliamentary republic, nor a central state, and while people may like to think it should be, the very purpose of a debt ceiling is to provide a minority with the ability to slam the breaks. If that isn't desired, then maybe Obama should change the entire system and give up any real power in favour of a prime minister.

So it turns out that deficits DO matter... eventually. And eventually has a nasty habit of arriving. I don't consider Wolf's article worthy of a serious commentator. Sometimes people act irresponsibly, and when the consequences start to make themselves felt, it is too late to go back. The US debt is beyond comprehension, as is the debt of the EU. The bomb that is going to explode one way or anothe ris a debt bomb, not the decisions of politicians in Washington, who are grapplijng with a situation THEY CANNOT CONTROL OR RESOLVE NICELY. There is a song line that is darkly appropriate here: "If not now, when?"

The debt ceiling is not used to reign in spending but to bind the president. The government debt increased sharply under the Bush administration but the tool of a debt ceiling was not imposed. There is a political bias in this tool and the usage of this tool is to enforce minority interests outside of democratic processes. It only shows the complete failure of democracy in the USA.

Martin, the reason why the debt ceiling exist is PRECISELY to prevent the insanity of over spending. It provides a tool for the people to act if they feel one arm or another of the government has overstepped their boundaries in terms of spending.

Removing it will be akin to letting politicians run amok with spending and borrowing. And you do not understand why this exists, then you have an issue with human nature. The Debt Ceiling is part of the check and balance of a proper democracy. And using it to reign in spending is the correct thing to do.

Much as the debt ceiling imbroglio is horrific, it is really part of a broader structural problem that there is no mechanism to break serious political deadlocks. In a similar standoff - the denial of supply in Australia in 1975 - there was a mechanism to resolve the deadlock. In that instance the titular head of state (who is technically non-partisan though some in the Labor party called foul) was able to use his reserve powers to dismiss the PM and call fresh elections. Would the existing members of Congress be so bone-headed if they had to immediately justify their position in a fresh election I wonder

Those who admired this article, as I did, will find further elucidation in yesterday's (10/14) opinion page piece by Harvard Professor and former contender for Fed Head Larry Summers. His main point was that the debt has been and may continue to decline sharply, and he showed how the odds of debt as a percentage of GDP being lower than today by 2050 could be as high as 40%. Whether that comes to pass, or not, it is likely, says Summers, that the addition of 0.2 percentage point of growth to GDP each year would relegate the "debt problem" to a secondary, not a primary issue, and thus, the energies of Americans should focus on growth.

Mr. Wolf ends his piece with strong warning about the ceiling limit but im afraid the consensus in Washington is nonexistent and the US is lurching to a default, even if it will only be partial or technical.

Excellent article - even better than usual. The impossible choices are laid out very clearly, and the least bad option - continue to borrow - is well justified.

The debt ceiling is clearly a very dangerous piece of legislation that does not make sense, since US borrowing needs are the result of congressional budget decisions.

It is a pity that the Obama administration did not spend its two years of democratic majorities in both houses to get rid of the debt ceiling and cleaning up some other areas of economic governance rather than focusing so much on Obama-care - even though the latter in and by itself is clearly a worthy piece of legislation.

The only reason an American president must push the constitutional boundaries to ensure that the constitutional principle that the "full faith and credit of the United States" stands behind its bonds is because neither the Senate nor the House of Representatives operates on basic democratic principles.

I believe that the Founders envisaged both of these legislative bodies to function on an overall basis in accordance with majority rule.

The American people should demand that both houses enact reforms to ensure that important legislation always comes to the floor for a majority vote.

The government in Washington D.C. should try democratic government. It works pretty well in a lot of other countries.

At the phenomenal rate that the US and its states are incurring debt that they will never be able to repay, default is a certainty. It is just a question of how much and when. Mr Wolf's recommendation, it seems, will accelerate our fate. Instead of blaming Congress for trying to stop our runaway train, China and all the other lenders of our folly should face reality now and turn off the spigot. Don't they realize that we are going to screw them?

Not surprisingly, coming from Martin Wolf, this is the best and most comprehensive article I have read on the impending default disaster, because it combines the political and economic factors involved. I would like to make two comments.

First, most of the media coverage of the debt ceiling crisis assumes that the Tea Party Republicans who are threatening to set off this financial nuclear bomb are acting out of ignorance of the consequences - that they "know not what they do". This may be true in the case of the brainless, Sarah Palin wing of the Tea Party, but it certainly doesn't apply to people like Ted Cruz or the people who bankroll him over at Heritage Action.

They know exactly what they do- namely setting off the financial nuclear explosion which Mr. Wolf talks about in order bring down the duly elected and reelected president, and beyond that, America's entire democratic system of government. Their goal is a right wing putsch, but one that using defaulted US treasury bonds instead of tanks. They have a visceral, fundamental hatred of democracy, because it is rapidly changing the face of America from white to brown, and it is also forcing the wealthy elite to give up a little of their power and privileges. Their goal of causing as much economic and political chaos as possible is deliberate, not incidental.

Second, this brings up the question of what Obama will do in this asymmetrical battle between the majority of Americans who want to preserve our economy and democracy from collapse, and the small minority which is trying to destroy them. The irony is that, as Mr. Wolf suggests, President Obama will have to become a strong executive, specifically by raising the debt ceiling unilaterally under the 14th Amendment. Possibly, this may be going beyond the Constitution in order to preserve it. As Mr. Wolf mentions, this may lay the ground for impeachment proceedings in the House, but what else is new?

The far right has been out to impeach him ever since he was first elected five years ago, President Obama should not be afraid to let the Tea Party have its little impeachment circus in the House, if that is what it takes to save America, and the word from a "nuclear" financial catastrophe. Then let the voters deal with Ted Cruz's Tea Party cohorts and their cowardly Republican supporters in Congress next year. Then no matter what financial and political bombs Ted Cruz and his fellow Tea Party fanatics try to set off, America, and the world, will be able to say, in the words of Horace: Non omnis moriar.

@Archimedes ... so the US kept their house in order for ten years after the 95/96 shutdown? really? how about you try half of that. because the house was no longer in order once Bush decided to squander the budget surplus oh and then go on a war binge ... in addition he expanded the government ...

This all has the feeling of unreality about it. If there is any realistic chance that the US will default, then this means that US bonds are now already insecure: the default possibility should be priced in. If the chances of a default are 1% and the consequences are economic armageddon, then we should right now be seeing 1% of an armageddon, but it doesn't look like we are (surely 1% of such a calamity would be noticeable). I conclude that either the chances of a default are much less than 1%, or the consequences are not as bad as made out.

@Archimedes. You cannot escape being banded together with the right-wing agenda, when you present your views as are. You cannot go on talk about President Obama as a "European socialist", when all he wants is economic justice. And I am not sure, if you saw the 2008 and 2012 election results. Apparently, I am not alone. I would support @readers proposal to sell Southern states. Problem is, it would widen our deficit, because we would have to pay for anybody to take any of these poverty stricken, under-educated states whose white people currently entirely depend on federal social programs.

Excellent article: it is hard to say anything more. Wish I could say the same about some of the comments on it.

In particular, I dispute the argument that because the US system seems to work well in calm times it should be sustained in turbulent times. The boundary conditions for success of the US government system, it seems to me, relate not to external stability or low/high deficits but rather the willingness of two sides to talk and compromise to reach agreement. That willingness is temporal and contingent.

In my view, the US system works admirably if the dominant voices in both the D&R parties are moderate enough to want to work out a middle ground. But, of late, one of these great parties has become observably influenced by extremist tendencies that see no honor or achievement in compromise. It is obvious which one I am referring to. Given that the debt ceiling legislation exists (the case for which, of course, was challenged in this article) it is clear where the immediate blame for the current impasse lies

I admit I am not an economist but the choices indeed look dire.Either they continue "solving" the debt by borrowing more, blowing more bubbles as it has been happening both in the US and in Europe as well, or as some of the European countries have done the US has to start a serious austerity program.As we see in Europe even the austerity is only a temporary solution, since anything only makes sense if somehow the quantitative growth returned.And this is the problem, as constant quantitative growth is simply impossible, it has already exhausted itself since it is unnatural thus it has no basis within a closed and finite natural system humanity exists in.We are not in a political or economical crisis, we are in a system failure.Only fundamental, systemic changes can help, and that is way beyond the present discussion.The present state with the "shutdown" and the debt ceiling discussions is like people stranded on a small island waiting for the rain, trying to decide who can hold the umbrella, while a huge tsunami is coming...

If by short term, Martin means overnight or weekly, that might work since lenders would have their money before any legislative action could derail it. Obama and Senate could then ratify the action in any subsequent debt ceiling bill.

I like selling assets to the Fed on a repo agreement. I'm sure it is totally bogus but Ben Bernanke has shown that he can buy literally anything in a pinch. How about all government buildings and land to the Fed balance sheet. That should pretty much eliminate the need for any debt ceiling ever.

@Archimedes. Yes, it is admirable to live in a country where 15% of the people have no health insurance. Many over the years have gone bankrupt over paying for health care costs, while all health indicators are below those of the Europeans and many emerging markets. As an American, I want to live with a certain degree of peace of mind, not worrying about disease destroying my finances. But I am sure you are with the Republican Representative, who recently stated: "if you got cancer, I am sorry for you, but it is your problem." Great. Family values right at work.

I was not starting an argument about fiscal deficits. I was pointing out that the deficit is large enough to have a substantial impact, given the weak environment, were automatic cuts to kick in and a default to occur. At the height of the boom, do you think that a temporary US default would have crashed the global economy? The gridlock in Washington, the financial crisis and the deficit all make for a rare set of circumstances.

After the 95/96 shutdown, the US actually managed to keep it's finances in check for about a decade, having previously run substantial deficits: the ceiling works.

Obama has centralised social policy enormously. It's no surprise that the Europeans love him because he is creating a European style government in the US.

The unitary theory supports my point on this. It is an "executive". Nothing more.

There is a way out of the trilemma - the executive could sell assets. Alaska was once bought from the Russians for money. It could be sold back at a huge profit, especially with its oil resources and Sarah Palin being such an expert on Russia. If that doesn't provide enough revenue then there are a number of Southern states that could go to the Chinese in a debt for asset swap.

Martin, spot on as always. In addition, I would like to add that the debt ceiling was introduced in 1917 by a very cooperative Congress, which helped President Wilson to prosecute the war against Germany. At the time, the debt ceiling was put in place because the President had to ask Congress for permission, each time he borrowed. Congress thought, rightly, that this undermined the President's executive power. Hence the debt ceiling. Now the previous requirement for the President to ask Congress for permission each time he borrowed, existed because at the time there was no budget law in the United States. In 1921, the Budget and Accounting Act was approved and in 1974 The Congressional Budget and Impoundment Act was approved, rendering the debt ceiling superfluous. In fact, at least since 1974 the debt ceiling is unconstitutional, as it can force the President to break the law. I have written extensively about the subject.

It came to be in a world without the entitlement spending programs we now have. Back then, debt issuance either had to be authorized by Congress or was limited in what the money could be used for. Many states require legislative approval of bonding bills. Can you imagine going back to a world with that?

Mr. Wolf is, I believe, correct in his explanation of the legal dilemma the President faces. But I disagree that the issue is separate from the separation of powers. Eliminate the debt ceiling, and then either we rely on Congress to approve new debt for our ever-increasing entitlement obligations every time its needed. Or remove its power of the purse and leave public borrowing to the President or the Treasury. Just thinking about what it would take for any such scenario to happen gives me heartache.

@ el supremo, Actually, I presented a clear solution. If the debt limit is binding, the president should obey the laws governing both revenues and spending and so continue to borrow. I even said how he should borrow. Of course, you may not like the solution. But it is one.

If this essay somehow represents a "left-wing" viewpoint, then I guess anyone who notes that the earth rotates to make the sun rise in the east and set in the west must also be a left-winger, because Mr. Wolf's statements here are the rough equivalent of that fact.

Presumably Mr. Rory H. adheres to the "viewpoint" of the know-nothing nihilist set of Republicans in the current USA Congress, for whom the most gratuitously destructive action or inaction has such appeal.

@ Archimedes, Do people ever actually look at the figures? The US fiscal deficit is down to 4 per cent of GDP, which is hardly very large a few years after a huge financial crisis.

The debt ceiling has nothing to do with the US constitution or the separation of powers. It is an inherently unconstitutional law because, as I wrote, it requires the president to disobey the law. It is, as such, indefensible. Which part of this argument do you find hard to understand?

The idea that Obama has decided to make the presidency particularly powerful is beyond absurd. The presidency has been vastly more powerful under many predecessors, not least his immediate predecessor. Do you remember the unitary theory of the executive?

Martin Wolf is absolutely right. It really is hard to understand how the debt ceiling law was adopted in the first place, in a country with a bicameral legislature and powers split between the executive and legislative branches. A comparison to the UK would be if the opposition were given an annual right to block all spending authorised by the current and every past government. It really is that absurd.

@ Rory H, If you define me as a member of the "left-wing intellectual elite" your need to meet a few more people. Your facts are also wrong. In the US, in particular, tough fiscal policies have been far more characteristic of the left than the right. Both Reagan and George W. Bush deliberately stoked huge fiscal deficits. Clinton ran a huge surplus. Obama, of course, inherited a huge deficits, as a result of the financial crisis. But public spending in real terms has (contrary to the myths) been exceptionally tight under Obama.

I agree with this article - a default would be disastrous.However, the problem with Martin is he's part of that left wing intellectual elite who never see an end to spending (or borrowing for that matter).Clearly cutting spending and borrowing in the bad times is not desirable, but unfortunately it's necessary because the left cannot be trusted to run sensible budgets in the good times!

Yesterday the banks in the USA started receiving new $100 bills with predominately displayed gold coloring on the right side of the bill. I am sure there is some kind of new bond or currency which will be "as good as gold" to soak up any excess debt whether newly or prior issued. The debt ceiling might be a big charade to have someone ride to the rescue with a new bond backed by low interest rate and a gram of precious metal to give it stability. JFK issued non interest bearing US notes in 1963. Grover Cleveland issued gold backed bonds after the early 1890's panic. Andrew Jackson took on the then Federal Reserve {2nd Bank of the United States} and all those presidents were Democrats fighting against the moneyed interests.Create a new bond with 1/2 of an old bond thrown in with a gram of Platinum or Gold for stability and all the prior issued debt would be soaked up and interest rates could be kept low. The value of the bond would rise or fall with the price of the collateral backing it.The USA has numerous stores willing to buy up any gold or silver so someone wants that gold at any price for some reason unknown.

@richard gordon, i've liquidated my entire equity portfolio too. The fallout from a us default is potentailly far more damaging than the gain from a relief rally should all this be resolved at the eleventh hour. The decision is a no brainer. My faith in usd assets has evaporated completely.

Call me a wimp, but I just liquidated my entire portfolio. My reasoning: There's always opportunities to make money, but I'm not too comfortable around people who've pulled the pin on a hand grenade which they're tossing it around.

This is pure B grade Hollywood movie ,At the last minute, the cavalry will charge and order will be restoredbefore that other cliches have to be acted ,the stern speeches talking about the good of the countryare the equivalent of crashing a sidewalk pile of cardboard boxes during the chase

worst case, the employee in charge of registering the deal is on furloughthe paperwork is not processedAmerican history has shown that at a pinch the president would shove respectfully the constitution aside

The debt ceiling was introduced to expedite the process of issuing new public debt (at the time during WWI). Without a more reasonable alternative I'm not sure the outcome would be any better, be it politically, fiscally or otherwise.

Maybe the President is praying for the debt ceiling to be hit and Congress to refuse to budge just so he can usurp Congress’s borrowing power, its taxing power; AND its spending power.

Once the Supreme Court had ruled this constitutional (which it might do because it would be considered essential to protecting the integrity of the United State, much like defending the country as Commander in Chief), future presidents would, like British Prime Ministers, be free to propose their own budget for approval or refusal (with no room for line amends).

I'm afraid my country is determined to self destruct. The continued existence of the debt ceiling is good evidence of that. I expect to see many comments here justifying its existence with esoteric economic theories presented with utter certainty. Oh, wait one not-so-esoteric yet still wrong theory pesented- I see the problem is that we are too emotional! Oh we are all to excited and emotional, of course that's the problem!

You're getting a little excited because we happen to still have a weak global economy, and because the size of the US deficit is so large that failure to reach agreement would be calamitous.

These devices are not designed for tricky times, though. Indeed the assumption is that in difficult times agreement is easier to reach. They are designed for boring times, to keep the president accountable. And, in boring times, they work admirably and according to the dispositions of American citizens.

By your logic, congress should also be abolished. What possible purpose does it have, other than interfering with the business of the president? Of course, the presidency is not supposed to be as powerful a position as Obama has decided to make it.

No, no. It's best not to make decisions about how best to tear apart institutions and constitutions at a time of panic, when everyone is excited and emotional.

About Me

When I was a very young man I had an incredible grandmother named Sarah Elizabeth Walters. She told me the following words: "Son don't let the grass grow under your feet." I took those words to heart and went out to see the world. My life has been ana adventure all over the world. I have lived on six of the seven continents. I have been lucky to live this long.